Salary consists of so many components like Basic, DA, HRA, Bonus, Commission, Allowances and Perquisites. But while calculating Gratuity, HRA, EPF and value of perquisites for rent free/concessional house we need to consider only few components of salary. So let us look into detail about those considerations.
1) Salary definition for Gratuity–
A) Gratuity covered under Payment of Gratuity Act 1972-For this purpose salary means only Basic salary and Dearness Allowance (DA). No other salary components will not be considered for calculaiton.
B) Gratuity not covered under Payment of Gratuity Act 1972-For this purpose salary means Basic salary, Dearness Allowance (DA) and Commission (if paid as a % of turnover).
Remember while considering salary in the case of (B) Gratuity not covered under Payment of Gratuity Act 1972 DA need to be considered only if it is forming part of retirement benefit otherwise not to consider. Also Commission should be in the form of % of turnover not lump sum payment.
2) Salary definition for House Rent Allowance (HRA)-For calculation of House Rent Allowance (HRA) you need to consider Basic Salary, Dearness Allowance(DA) and Commission (if paid as % of turnover).
Again in this case too DA need to be considered if it is forming part of retirement benefit otherwise not to consider and Commission also need to % of turnover.
3) Salary definition for Employee Provident Fund (EPF)– For calculation of salary components under employer’s contribution towards recognized provident fund too we need to consider the same salary components of HRA i,e Basic Salary, Dearness Allowance(DA) and Commission (if paid as % of turnover). Also the above said conditions of considering DA and Commission too will apply here also.
4) Salary definition for Leave Encashment-In this case also you need to consider the same salary components as you considered for HRA and EPF.
5) Salary definition for rent-free/concessional house perquisite valuation-Below salary components are considered while calculating the valuation of perquisite.
a) Basic Salary;
b) Dearness Allowance (if terms of employment so provides);
f) All taxable allowances (excluding amount not taxable); and
g) any monetary payment which is chargeabble to tax (by whatever name called).
But it does not include-DA if not considered for retirement benefits, employer’s contribution to provident fund account of an employee, all allowances which are exempt from tax, any lumpsum amount received like Gratuity, Leave Encashment, VRS or Commutation of Pension and value of perquisites (under section 17 (2)).
Hope I simplified the Salary definition for the calculation of above facilities.